Over the last year applications service providers (ASPs) and hosted applications have been heralded as the ultimate solution to the messy logistics of customer management but also reviled as quick underperforming fix. But whether this model will really thrive in the CRM arena has yet to be decided. Analysts have questioned the extent to which hosted CRM would succeed, citing various drawbacks that could hinder--if not outright prevent--CRM from working in a hosted environment.

While the objections remain legitimate, many experts have grown more optimistic in recent months, partly because the ASP model is evolving and partly because they've seen at least a few companies adopt hosted CRM with some success. David Caruso, a CRM analyst with AMR Research, counts himself in this camp. "I wrote a very negative report about the ASPs last year," he notes. "I thought they'd really missed the mark in terms of services, capabilities, pricing models, you name it. They're still struggling with these issues, but I now think they're headed in the right direction. As many CIOs and COOs are coming to realize, hosted apps don't just give you a sustainable competitive advantage, but a renewable one. In the right circumstances, a company can greatly benefit under this model, and the interest level is growing."

Not All It's Cut Out to Be?
What are the concerns that have kept analysts from recommending rented CRM, and why are many executives less than enthusiastic about this model? Consider some rather grounding numbers put forth by the GartnerGroup: By year-end 2001, 60 percent of today's ASPs will no longer exist. And through 2003, 30 percent of ASP customers will experience a security incident at the ASP that results in the compromise of sensitive data. "These are just a couple of things that should make companies think hard about whether they really want to go with hosted CRM applications," says Michael Maoz, a senior research analyst with Gartner.

Aside from the potential for ASP disaster, there are the day-to-day issues that pose challenges. Topping these are problems related to customization and integration, or more specifically, to a lack thereof. Bob Chatham, a senior analyst at Forrester Research, explains. "When we look at the solutions people are willing to have hosted, things like financials and ERP are high on the list, but CRM is at the bottom. That's largely because of the customization and integration requirements--CRM apps are some of the most customized and integrated that a company has in its technology portfolio, but only minimal customization is allowed in a hosted environment. Likewise, as ASPs evolve, they'll be able to offer more in terms of integrating hosted CRM to your back-office applications, but right now that remains a challenge."

Robert Mirani, director of CRM strategies at The Yankee Group, agrees. "People simply don't want a vanilla package when it comes to CRM," he asserts, "and that will no doubt present an obstacle for the hosted model going forward. The early adopters with whom we've spoken understood that customization would be very limited and were okay with that, but not being able to heavily customize will keep a number of companies from going this route."

Industry pundits are also universal in agreeing that integration presents a huge challenge for users of hosted CRM. "The back office is where substantial amounts of critical information are stored," notes AMR's Caruso. "For CRM to work, integration to back-office apps--especially ERP--is critical, but most ASPs cannot yet provide strong integration to them."

Bob Thompson, president/founder of Front Line Solutions, a research and consulting firm specializing in PRM, and founder of CRMguru.com, recently conducted a PRM best practices study that further underscores the integration dilemma. Over half of the projects he assessed involved sites using hosted applications, and, he says, integration-related challenges were the Number 1 obstacle people mentioned.

Customization and integration issues aside, there's another reason why companies shy away from hosted CRM. Simply put, they view their CRM apps as too critical to trust to someone outside the company. "CRM is at the heart of a company's business processes and of its behavior with customers," asserts Forrester's Chatham. "For that reason, many feel it's too near and dear to let go of, so they won't trust their CRM applications to an ASP." The problem is compounded in Europe, he notes, where, because of privacy concerns, hosting customer data at someone else's site would be frowned upon.

But There Are Benefits...
Despite the drawbacks, early adopters have begun making the leap to hosted CRM. "The more pressure you're under, the more willing you may be to live with these drawbacks," says Thompson, "and a number of companies are going for it." Maoz notes that while Gartner has fewer than 10 clients using the ASP model for CRM, those clients are satisfied. "Specifically, they're using hosted versions of Siebel and Onyx," he explains. "They like the predictable monthly costs and the flexibility they gain in terms of managing the growth and complexity of the applications."

The big benefits of hosted apps--speedy implementation and access to hard-to-find IT and consulting skillsets--provide strong appeal for some companies, especially those in the midmarket. As one expert pointed out, people want a quick fix, and hosted CRM apps represent an even quicker one. "Speed to benefit is a compelling reason to consider hosted CRM," says Caruso. "A lot of IT shops couldn't do CRM with what they currently have on their plates. When their V.P. of marketing comes to them and says, 'We need CRM and we need it now,' they start taking a hard look at hosted applications. On their own, they can't get there fast enough."

Beyond time to benefit, early adopters of hosted applications cite the challenge of maintaining up-to-date consulting and IT skillsets as an impetus for renting CRM solutions. "Finding skilled people to run and maintain your applications isn't a problem, but keeping them current on the torrent of new skills required to do their jobs is difficult," says Caruso. "I'm talking about C++, Web and HTML development tools talent, communications tools talent and so on. For many IT shops, these are very disparate skills that go way beyond their traditional hiring practices, so they reach a point where it looks more practical to find an ASP that specializes in those areas."

Finally, ASPs are finding a niche among businesses in remote or geographically unappealing locations. Explains Chatham, "You might have trouble hiring a Siebel administrator in an area that doesn't attract a lot of IT talent. For companies in those areas, using hosted CRM applications makes sense."

Changing Corporate Mindset
Beyond the benefits of hosted CRM, a recent shift in corporate thinking has made the ASP model more appealing for some. As Caruso explains, executives have traditionally felt that they needed to own all their applications and keep them all in-house, but in recent years, they've begun to rethink this stance. "Many large companies own a huge portfolio of best-of-breed applications, complete with all the headaches related to integrating them and finding experienced IT personnel to manage them," he says. "Executives are starting to say, 'Wouldn't it be nice if someone outside could provide the applications and also maintain and update them for me?' "

Thompson adds another slant. "In the past, companies were viewed as fortresses, but the idea that you've got this fortress around your enterprise and that you won't let anyone in is already a myth. As more and more applications go online and fears lesson concerning data privacy, interest in hosted CRM will follow."

Hand-in-hand with this increased interest in hosted applications will be a greater interest in outsourcing entire departments and business functions, say analysts. "From where I sit, hosted apps are interesting," explains Caruso, "but we're seeing more and more CIOs and strategic planners saying, 'Wouldn't it be even better if I could just outsource the whole department?' Hosted services that provide a means of outsourcing departments will play a big role in the corporate future."

The ASP Filter
When experts talk about hosted CRM, they often cite the benefits for midsize companies, and with good reason. "The midmarket is definitely the sweet spot," asserts Chatham. "Midmarket companies typically have good, reliable Internet connections coupled with budgets that make hosting a sensible option. For those just now rolling out sales force automation, this is not a bad time to think about going the hosted route and getting it all from one vendor."

But what about larger organizations? Most analysts discount hosted apps for big firms, and their reasoning makes sense. Among other things, Fortune 1000 firms likely have the resources and experience to keep their applications in-house, and they also have budgets that allow for large-scale implementations. In many cases, they have more experience running their CRM applications than any ASP would have, not to mention the significant investments they've already made on in-house applications. So it's logical for them to shun hosted apps, right? Not necessarily, says Caruso.

In January of this year, Caruso hosted a CIO roundtable of Fortune 500 companies. "We covered the whole gamut on ASPs," says Caruso, "and the most important takeaway I got from that discussion was that, while these companies wouldn't abandon their most mission-critical applications that are already in-house, they're passing every other application through what I call 'the ASP filter'--Is this an application that lends itself to being hosted? Is it one where time to benefit far exceeds our ability to bring it in-house? Does this application require certain IT skillsets that we'll have difficulty finding? If the answer is yes to these questions, then they're going out and shopping for ASPs."

still, wouldn't CRM fall in the "mission-critical" category, making it fail the ASP test? "Possibly," asserts Caruso, "but I think there's a subtlety between real relationship applications and things like SFA tools and e-mail engines. There are a number of such tactical components to CRM that do lend themselves to a hosted environment, and large companies will likely embrace those."

Traditional CRM Vendors:
To Host or Not to Host?
For traditional CRM vendors, will hosted versions of their solutions eventually represent a sizable piece of market share? According to Chatham, the answer is yes. "I'd venture to guess that within five years, hosted apps will represent half to two-thirds of the midmarket opportunity for CRM vendors," he speculates.

Caruso is also optimistic. "What I say to every CRM vendor right now is this: If you don't have a hosted strategy, go back to your office and develop one today. You've got to get your mind wrapped around this issue because it's going to have a profound impact on the marketplace. Look at Interact.com," he adds. "They're betting the farm on hosted applications, and I think it's a good bet."